1. Introduction

As described in the activity report, one of the two core functions of Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) is to monitor compliance with Sri Lanka Auditing Standards by the auditors of Specified Business Enterprises (SBEs), when they conduct audits of the financial statements of SBEs. SLAASMB approach the monitoring function by inspecting a sample of audits of general purpose financial statements to ascertain compliance with Sri Lanka Auditing Standards in the conduct of the audit.

This audit monitoring activity of SLAASMB is performed with the objective of improving audit quality in the audit market environment. Quality audit in turn contributes towards improved financial reporting activity which helps to build investor confidence and support the capital market development. Focused on the far reaching benefits of enhanced audit quality SLAASMB has taken several initiatives to improve the monitoring mechanism by adopting global best practices in to existing processes.

Audit monitoring is performed by SLAASMB as engagement specific Regular audit inspections and Theme specific audit inspections which focus on a comprehensive review of a predetermined theme throughout the audit. SLAASMB selects audits for inspection considering a risk based approach as well as a random selection approach. However, as a means of continuous improvement, during the year, SLAASMB ventured into developing a new risk-based selection approach to select audits for inspection, which is expected to be adopted from 2021.

2. Impact on COVID 19 on auditing

The effects of the health and safety measures imposed with the aim of curtailing the spread of the COVID 19 pandemic has had its effects on the audit industry as well. Mobility restrictions and remote work environment caused many auditors to perform the audits from remote locations.

Remote-based conduct of audits requires high dependency on information technology. This is evident in countries with developed IT infrastructure systems which have moved towards conducting the audits remotely. However, in Sri Lanka, the auditors have had to face many challenges when conducting audits based on available IT infrastructure. This situation has given new opportunities to audit firms to move towards investing more on digitalizing audit methodologies. Globally, members of international networks too have been pursuing on the journey of digitalization of their audit methodologies. This move is being witnessed as a current trend at the international level.

The impact was also experienced as time pressure by the auditors when meeting reporting deadlines. However, extensions to reporting timelines of listed entities granted by the Colombo Stock Exchange had no doubt assisted the auditors in this respect.

In general, all auditors have faced challenges in the conduct of the audits in aspects such as remote auditing, time constraints, availability of information, and physical access to management. Difficulties in gathering audit evidence due to limited physical accesses resulted in auditors receiving information in digital form instead of the usual paper form. High dependency of non-physical form of evidence requires use of auditors’ professional judgement in to diverse aspects of the audit and requires the auditor to perform additional procedures to ensure the validity of such audit evidence.

Entities having to perform remote operations deviating from the regular internal control procedures also forced auditors to closely monitor the control measures taken by the entities. In addition, the impact of the pandemic on the operating environment of entities increased the audit risk associated with the valuation of assets (such as impairment of assets, expected credit losses on the financial assets and recoverability of deferred tax assets) and in assessing the completeness of liabilities. Further, auditors have been required to be alert on evidence of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern due to the impact of COVID 19 pandemic to the businesses. Accordingly, the above challenges have required the auditors to exercise significant amount of professional judgment, remain skeptical and focus on ethical responsibility when carrying out audits during this challenging period.

3. Enforcement actions

Based on the severity of the observations made during the inspections, SLAASMB adopts diverse measures in its effort to make the auditors to improve themselves in order to achieve the objective of improving the audit quality environment in Sri Lanka.

When regular audit inspections result in observing non-compliances with Sri Lanka Auditing Standards which are not material as to require further action under the statue, such deficiencies are communicated to the audit firms by letters of assistance termed as “Letters of Observations”. When improvements are required in audits to improve audit quality, such improvements are communicated as suggestions for improvement. In addition, when the auditor is observed to have failed to exercise the fundamental ethical principles of professional competence and due care in the conduct of an audit of a SBE, a letter of warning is issued to the audit firm with approval of the Board, requiring the said firm to act diligently and in accordance with the requirements of applicable auditing standards, when conducting audits of financial statements, in the future. Further, based on the significance of the issues, where necessary, SLAASMB refer the deviations to the Attorney General for advice and where the deficiencies are in the audit quality, such matters are directed to CA Sri Lanka and to any other financial sector regulator as applicable.

During 2020, one audit inspection has been referred to Attorney General of which the proceedings are in-progress.

4. Regular audit inspections

During the year, regular audit inspections were conducted on 27 audit engagements carried out by 7 audit firms compared with 33 audit engagements conducted by 7 firms during 2019. The total number of audits inspected were lower than in 2019 mainly due to the lower number of inspection staff being available during 2020. Further, due to the requirements of social distancing and access restrictions on having direct contact when performing thematic audit inspections, the plan to perform thematic audit inspections were re-evaluated. There by with the requirement to dedicate additional time to review the appropriateness of audit procedures performed by auditors when addressing the effect of COVID 19 on the operations of the entities audited, the inspections were limited to Regular audit inspections.

Further, during the year, SLAASMB finalized the findings of the thematic audit inspection conducted in 2018 and published the Report.

4.1 Letters of Assistance

As referred in Enforcement actions, when findings on non-compliances with standards are not material as to require further action under the statue, such deficiencies are communicated to the audit firms by letters of assistance termed as “Letters of Observations”. Such deficiencies were identified in 4 audit engagements conducted by 4 firms.

Significant deficiencies communicated include:

4.1.1 Failure to express an appropriate audit opinion

Failure by the auditor to express an appropriate audit opinion was observed in the following instance;

  • When the financial statements had contained significant non-compliances with Sri Lanka Accounting Standards auditor had concluded that the financial statements are prepared in all material respects, in accordance with Sri Lanka Accounting Standards.

4.1.2 Failure to obtain sufficient appropriate audit evidence

Failure by the auditor to obtain sufficient appropriate audit evidence were observed as follows:

  • Not performing substantive procedures appropriately in relation to identifying and evaluating unusual variances in the comparison of revenue with the previous year, to assess accuracy of the revenue cut-off, and failure to verify the occurrence, completeness and valuation of revenue.
  • Not performing adequate audit procedures to verify the fair value of land and buildings focusing on, evaluating the competence, capabilities and objectivity of the management’s expert, obtaining an understanding of the work of the expert, and evaluating the appropriateness of that expert’s work as audit evidence for the relevant assertions

4.1.3 Failure to perform adequate audit procedures relating to accounting estimates including fair value accounting estimates.

Failure by the auditor to obtain sufficient appropriate audit evidence on fair value estimates was observed in the following instance;

  • Not performing appropriate audit procedures to ensure completeness of data used in concluding an assumption used for impairment computation of a finance company.

4.2 Suggestions for Improvements

When improvements are required in audits to improve audit quality, such improvements are communicated as suggestions for improvements.

During the year, suggestions for improvements relating to 10 audit engagements were communicated to 6 firms. The auditors of such firms are expected to improve on the areas identified in their future audits.

Suggestions for improvements communicated during the year include;

  • To consider other information gathered during the risk assessment to understand and evaluate the results of analytical procedures performed as a risk assessment procedure, when data aggregated at a higher level has been used in such analytical procedures.
  • To assess reasons for unusual circumstances reflected in the audit sample by making further inquiries in order to identify possible material misstatements.
  • When selecting an audit sample, to consider the specific purpose to be achieved and the characteristics of the population from which the sample is to be drawn.
  • To adequately challenge the assumptions used by management in order to ensure the reasonableness of accounting estimates made by the entity
  • To adequately document all audit procedures performed, in the audit working papers in order to support the ascertaining of management’s assertions and to maintain the understandability of the audit approach
  • To ensure that the conclusions drawn from each of the audit procedure performed corresponds with the respective audit procedures and evidence obtained is documented in the working papers.
  • When revenue is presented as a single line item in the financial statements, to evaluate the aggregate impact of deviations identified in relation to cut-off of revenue categories, which were below the materiality level when considered individually.
  • To document the reasons for deviations from the samples designed at the planning level.

5. Thematic Audit Inspections

5.1 Focus of the theme

The Thematic audit inspections commenced in 2017 by SLAASMB continued to focus on firms’ policies and procedures in respect of a specific area or aspect of the audit, by inspecting selected audit engagements of such firm. With the findings of all inspections being reported together, the report includes a comparison of findings and highlights good practices and areas of common weaknesses relating to the selected theme or specific area.

During 2020, SLAASMB issued the report of the thematic audit inspections conducted among 19 audits of 5 firms during 2018 on the theme, Auditor’s communication with Those Charged with Governance (TCWG) in the audit of financial statements of listed entities. The said theme was identified to be appropriate considering the effective two-way communication between the auditor and TCWG and its contribution towards enhancing the capital market development in the country. In the inspection process, SLAASMB obtained feedback of the Audit Committee chairs of the auditee entities, to gain insights to the timeliness and effectiveness of the said two-way communication.

5.2 Findings

The findings of the thematic audit inspection conducted during 2018 are included in the detailed report of the thematic audit inspections issued during 2020 and published in the website www.slaasmb.gov.lk

SLAASMB, being the regulator monitoring compliance with accounting standards and auditing standards, advocates good communication between the three parties, namely the auditor, regulator and TCWG. Considering the improvements envisaged by adopting the good practices identified during the inspections, SLAASMB has shared copies of the Thematic Audit Inspection Report issued during 2020, with all the audit firms, Chairpersons of listed entities and the Chairpersons of Audit Committees of listed entities.

The salient features identified from the Thematic Audit Inspection Report issued during 2020 relating to auditors’ effective communication with TCWG are as follows.

5.3 Key inspection findings on making the two-way communication effective

  • Consideration of appropriate person as TCWG-

    Auditor’s professional judgement in determining the appropriate persons to be considered as TCWG, and consistency in such determination is a key to good two-way communication.

  • Importance of establishing the communication process early-

    Establishing the communication process at the planning stage helps in enhancing the effectiveness of two-way communication

  • Impact of entity’s governance structure on communication-

    The entity’s governance structure affects the method of communication and matters to be communicated. Accordingly, the method of communication and matters to be communicated are essentially not determined based on firm’s policies and procedures.

  • Use of Engagement Letter-

    Engagement letter is used as the main tool to communicate auditor’s responsibilities towards the financial statement audit. Separate engagement letters are used for non-audit services.

  • Methods of communication –

    Meetings, presentations and letters are common methods of communication during different stages of the audit.

  • Insights of TCWG –

    Active involvement of TCWG at such meetings and presentations are useful for effective two-way communication and contributes towards effective decision making of both parties.

  • Evidence of the two-way communication-

    Meeting minutes maintained by the auditor or extracts of the minutes maintained by the entity is a key to provide evidence of the two-way communication had during the audit.

5.4 Highlights from Audit Committee discussions

  • Entity’s governance structure and regulatory influence affects effective discharging of duties and responsibilities by the Audit Committee. Regulated entities and entities which are not dominated by individuals, provide more independence to the Audit Committee to exercise their judgements
  • Audit Committee plays a major role in relation to the appointment of the auditor, determining of audit fee, obtaining non-audit services, and ensuring maintenance of auditor independence
  • Active involvement of Audit Committee throughout the audit process and meeting auditors without the presence of the management, contributes towards minimizing the audit expectation gap
  • Chairing of Audit Committees by persons with financial acumen contributes significantly towards effective functioning of the Audit Committees

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Sri Lanka Accounting and Auditing Standards Monitoring Board
3rd floor Bible House Building,
293 Galle Road, Colombo 3, Sri Lanka
94-11-2301210
94-11-2301211

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